Download ECO1 REV1 – Answers

Practice Questions #1
1. Which are the 5 ingredients that make up an economy?
Land, capital, labor, entrepreneurship, and technology.
2. Mass customization sacrifices volume for the sake of products and services tailored to
individual tastes and preferences. False
3. A mismatch between capacity of capital for a firm and the number of workers required to
operate it at optimal levels leads to increased opportunity cost. True
4. What can eliminate scarcity permanently? Nothing.
5. How would the following shift the US PPC?
a. Increased human capital left
right
b. Nano technology
left
right
c. A smaller labor force
left
right
6. If price increases then demand would decrease. False, impossible
7. If price decreases then quantity supplied would decrease. True
8. Which of the following would decrease demand (shift it to the left). Circle all that apply.
a. Smaller number of buyers
b. Higher income
c. Increase in price
d. Lower future price expectation
e. Cheaper substitute
f. Lower price
g. Cheaper complement
9. Which of the following would increase supply (shift it to the right). Circle all that apply.
a. Greater number of sellers
b. Higher resource prices
c. Higher prices
d. Lower future price expectation
e. Another product seller can produce or sell that possesses a lower price and lower
profits
f. Lower taxes
g. Lower prices
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10. Which of the following has a higher OC?
a. Selling surf boards in Iowa
b. opening an upscale restaurant in Boston
Iowa is landlocked, so it makes little sense to invest in a store that sells surf boards. On the
other hand, Boston’s relatively high income can support an upscale restaurant, so it makes
sense to invest in it.
11. Espresso and milk are complements. If the price of espresso decreases, then:
a. Demand for espresso increases
c. Demand for espresso decreases
b. Demand for milk increases
d. Demand for milk decreases
14. What would increase quantity demanded and decrease quantity supplied?
a. Increase in price b. Decrease in price c. Increase in number of buyers
15. What would cause the price of anything to decrease?
a. An increase in Demand or decrease in Supply
b. A decrease in Demand or increase in Supply
16. What is the overall cost for a man who earns $900 per week with an employer who does not
offer paid vacations, if he must spend $3,000 to go on a 7-day cruise, plus arrange to kennel his
dog for $25 per day?
a. $3,025
b. $3,175
c. $4075
d. None of the above
17. OC is fiercest when an economy is efficient, because the production of one more thing can
only come at the expense of something else. True
19. We continue production so long MB > MC and stop when they’re equal. True
20. Public goods are necessary because all can benefit regardless of income and tax contribution.
True
21. The maturity stage of a product or company best demonstrates the Law of Increasing OC.
True
22. When the price of a product or service changes, then the quickest and cheapest solution for a
business is to hedge against losses by reducing the quantity supplied.
23. Explain the six factors that would bring about economic growth?
See notes at end of outline from chapter 2, in your booklet.
24. A decrease in supply graphically means that a decrease in total quantity supplied (a change in
the range) has occurred, perhaps a reduction in prices as well. True
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25. Stating that “Life is hard” is an example of positive economics. False
26. Looking at the graph below, what is the opportunity cost of producing 40 units of y?
12 units of x
Note this chart, study what is and what is not attainable.
Additional Points:
1. Suppose that you have a marginal benefit of $200 per month should you rent your basement,
then according to Marginal Analysis, you should rent your basement if:
a. Your net worth is negative
b. Your marginal cost is $50 (why? Because the $200>$50)
c. Your marginal cost is $250
d. The basement is not needed for storage
2. How does the following change Demand or Supply?
a. Business taxes are decreased on the textile Industry.
A reduction in taxes leads to a reduction in costs. Since such a relief in costs is a booster
for profits, then supply in the textile industry will flourish. More profits not only encourage
existing firms to produce more, but they also attract new sellers, which reinforces the increase in
supply.
b. Capital becomes readily available for grain growers.
The increase availability and access to capital is a form of technology increase for the
grain growers. Since capital reduces labor costs and increase the production at often higher rates,
the supply in this industry will increase.
c. A new study reveals that legumes reduce bad cholesterol.
Now that legumes are more to tastes and preferences, demand for them will increase.
Long term producers and sells will capitalize on the increase demand and up the supply as well.
d. Price of home heating oil is expected to increase in the future.
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The buyers will increase demand in an effort to lock in lower rates in anticipation of a
price increase, but the sellers, in the short-term, will try to reduce supply in the hopes of driving
the prices up.
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